Page 900 - Accounting Principles (A Business Perspective)

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Understanding the learning objectives
• A budget is a plan showing the company's objectives and how management intends to acquire and use
resources to attain those objectives.

• Several kinds of budgets are responsibility, capital, master, planned operating, and financial budgets.
• A budget: (1) shows management's operating plans for the coming periods; (2) formalizes management's
plans in quantitative terms; (3) forces all levels of management to think ahead, anticipate results, and take
action to remedy possible poor results; and (4) may motivate individuals to strive to achieve stated goals.
• Other benefits are: business activities are better coordinated; managers become aware of other managers'
plans; employees may become cost conscious and try to conserve resources; the company reviews its

organization plan and changes it when necessary; and managers foster a vision that might not otherwise be
developed.
• Top management support: All management levels must be aware of the budget's importance to the
company and must know that the budget has top management's support.
• Participation in goal setting: Employees are generally more likely to strive toward organizational goals if
they participate in setting them.
• Communicating results: People should be promptly and clearly informed of their progress.
• Flexibility: The operating budget should be restated if the basic assumptions underlying the budget change
during the year. For control purposes, after the actual level of operations is known, the actual revenues and

expenses should be compared to the expected performance at that level of operations.
• Follow-up: Managers should check budgets continuously and correct them whenever necessary because
budgets deal with projections and estimates of future operating results, cash flows, and financial position.
• Managers develop a planned operating budget in units rather than dollars. Managers forecast sales units for
the year. Then, based on the sales forecast and the company's inventory policy, they forecast production
requirements in units.
• Next, dollars must be introduced into the analysis. A forecast of expected selling prices must be made, and

costs must be analyzed.
• Management then prepares a schedule to forecast cost of goods sold.
• After forecasting the cost of goods sold, management prepares a separate budget for all selling and
administrative expenses. Several supporting schedules may be involved for other various expenses.
• The totals on the separate budgets are combined to form the planned operating budget, which shows the
budgeted income after income taxes for a certain period.
• A flexible operating budget is a special kind of budget that provides detailed information about budgeted
expenses (and revenues) at various levels of output.

• This budget shows the effect that different volume changes, in per cents of capacity, have on the expenses of
a company.
• Preparing a financial budget involves analyzing every balance sheet account in light of the planned activities
expressed in the income statement.
• Managers usually prepare a separate cash budget to show sources, uses, and net changes in cash for the
period.

Accounting Principles: A Business Perspective 901 A Global Text